Isetan Mitsukoshi Holdings Ltd.'s (TSE:3099) Shares Climb 27% But Its Business Is Yet to Catch Up

The Isetan Mitsukoshi Holdings Ltd. (TSE:3099) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 54%.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Isetan Mitsukoshi Holdings as a stock to potentially avoid with its 18.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's superior to most other companies of late, Isetan Mitsukoshi Holdings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Isetan Mitsukoshi Holdings

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Isetan Mitsukoshi Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 1.9% per year over the next three years. That's not great when the rest of the market is expected to grow by 9.9% per year.

In light of this, it's alarming that Isetan Mitsukoshi Holdings' P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

What We Can Learn From Isetan Mitsukoshi Holdings' P/E?

Isetan Mitsukoshi Holdings' P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Isetan Mitsukoshi Holdings currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Isetan Mitsukoshi Holdings with six simple checks on some of these key factors.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.